Profitability for Organic Dairy Farms for 2006
By Bob Parsons, Extension Associate Professor, University of Vermont
"... the organic dairy sector has become a haven for smaller family operated farms that could not or would not continue with the
'get bigger or get out' scenario
associated with surviving in
conventional dairy production.
But they have not escaped the
situation where rising feed, fuel, and other expenses continue to chip away at their profitability so that they are faced with the same
familiar scenario as their
The trend of the profitability in 2006 continued to show improvement for Vermont and Maine organic dairy farms as compared to 2005 and 2004 with Vermont farms not doing quite as well as those in Maine. But just as the sector is beginning to show competitive profits, the situation has dramatically changed as feed prices since October 2006 have skyrocketed, hitting the organic sector harder than conventional dairy farms. Analysis also indicates that for that average organic dairy farm to survive under today’s feed and fuel prices, the base milk price needs to be nearly $33 per cwt. And the milk price will likely need to go even higher, depending on the continuing inflationary pressure on feed, fuel, and other farm expenses.
Profit up for Maine farms
greater than for Vermont
In 2006, the average Return on Equity (ROE) for 41 northeast organic dairy farms was 4.3% as compared to a -0.3% ROE in 2005 and a loss of -1.7% ROE in 2004. This is after a charge of $35,000 for unpaid owner/family labor. There was quite a difference in New England with Maine farms showing a 7.8%
ROE vs. a 3.3% ROE for Vermont farms.
Why the difference between the Vermont and Maine farms? One big difference that the small sample of Maine farms (9) may represent is a greater proportion of well managed farms as compared to the greater number of Vermont farms (32). For size, the Maine farms were a bit larger with 65.4 cows per farm and produced more milk at 14,616 lbs per cow as compared to 62 cows per farm and 13,129 lbs per cow for Vermont dairy farms. The Maine farms also enjoyed a higher milk price, $29.31 vs. $28.71 per cwt. The biggest difference between the two states in regard to income was in dairy cow sales and government payments. One Maine farm sold nearly $99,000 of bred heifers that significantly raised the average income of Maine farms.
As a group, the Maine Farms were more likely to be involved in cropping and eligible for government crop program payments. Another big difference was that Maine provided dairy farmers with a supplemental payment in 2006 that was more generous than the Vermont program. In addition, Vermont had 2 farms that did not collect any government payments due to personal reasons, lowering the average for the Vermont farms. The $22,000 difference in government payments per farm is related directly to the difference in net farm earnings.
The biggest cost difference between the 2 states was in purchased feed, with the Maine farms purchasing nearly $29,000 more grain than the average Vermont farm. The Maine farms also spent nearly twice as much on labor, $40,277, as compared to nearly $23,000 despite the herds being the about the same herd size. Overall, Maine farms accrual production expenses were $45,000 higher than Vermont farms, or about $500 per cow ($3927 vs. $3472). The bottom line is that production expenses per cow are quite high for organic dairy farms.
There are always some non-cash expenses and receipts that the farmer does not see in the milk check but are like money going into or out of a savings account. Depreciation is the charge for wearing out equipment and buildings and Maine farms had more than $9000 higher depreciation than Vermont farms. In addition, Maine farmers in 2006 had a decrease of feed inventories of nearly $7230 while feed inventories for Vermont dairy farms increased by $3720, a difference of nearly $11,000.
For this study we added a charge of $35,000 for family living, a charge that represents a conservative estimate for unpaid family labor and management. While some smaller farm families do live on less, many families require a much greater amount for family living. From another perspective, we doubt if any farmers in our study would be willing to work the same number of hours of management and labor for someone else for only $35,000.
Profitability for this study is calculated by taking cash income plus accrual income changes and subtract cash expenses and accrual expenses as depreciation and changes in accounts payable. We then subtract $35,000 family living to arrive at net farm earnings. Vermont organic dairy farms averaged $23,200 while Maine farms averaged $49,377 (including the $22,000 difference in government payments. Net farm earnings were $234 per cow for Vermont while Maine farms averaged $793 per farm (including $494 in government payments).
The conclusion from this study is that 2006 was the first year that the average organic dairy farms in the northeast had income in excess of family living for the first time since 1999. And when we look at the farms by state, the more representative sample from Vermont indicated the organic dairy sector was healthy but still not able to achieve a 5% ROE that makes it comparable to reasonable returns. So while the farms were doing better, it’s not the avenue to get rich quick as perceived by some outside observers.
Difference between Farms
We have been examining the “average” Vermont organic dairy farm but there was considerable variation between farms. The 32 Vermont organic dairy farms ranged from 21 to 189 cows. Milk production per cow ranged from 18,691 to 7,660 lbs. Purchased grain expenses per cow ranged from $1842 to 0. That’s right, one farm does not purchase any grain and is dependent 100% on forage. This farm had the lowest milk per cow but not the lowest net earnings per cow!
Net return per cow ranged from a loss of -$783 per cow to $1610 per cow. The farms with more than 100 cows tended to have greater earnings per cow. For this year, 12 of the 32 farms showed negative net farm earnings. Return on Equity (ROE) ranged from -20.6% to 21.9%, with 47% of the Vermont farms showing a ROE greater than 5%.
What this tells us is that while the average numbers give a view of the organic sector, some farms are doing quite well and some are not doing as well as desired. But 100% of the farms are satisfied or very satisfied with their decision to go organic. Many have indicated that they do not think they would be in business if they had stayed with conventional production.
Compare to Conventional Dairy Farms
Conventional dairy farms had a much worse year in 2006 due to declining milk prices. No doubt, conventional dairy is challenging due to fluctuating prices, going from record lows in 2002 to record highs in 2004, dropping again by 2006 and soaring to record highs again in 2007. However, in 2006, the average small farm in the Farm Credit Northeast Dairy Farm Summary showed a loss of -$307 per cow as compared to the profit of $234 for Vermont organic dairy farms. The conventional dairy farms averaged $778 in purchased feed (grain and forage) costs as compared to $1127 for Vermont organic dairy farms. Labor expense was $264 per cow as compared $308 for the Vermont dairy farms. Labor costs per cow for the Maine organic dairy farms was considerably higher at $595 per cow.
On the income side, the smaller conventional dairy farms averaged 19,457 lbs per cow at a price of $13.62 per cwt. So production per cow was more than 6,000 lbs higher, but the milk price was less than half. When comparing to the higher feed prices paid by organic dairy farms, both conventional and organic farms spent 29% of their milk income on purchased feed.
The problem with examining financial data is that both income and expenses change in a short time period. Beginning in October 2006, conventional corn began to climb in price due to ethanol production, exceeding $4.00 by March 2007. Conventional commodity prices stabilized through 2007 only to take off again in late 2007 to levels of $5 for corn, $11 for soybeans, and wheat soaring over $10 per bushel. Accordingly, organic prices also soared to unheard levels (Table 1). In addition, everyone knows about the soaring fuel prices.
Table 1. Organic Feed and Milk Prices 2000-2008.
To see how this would impact organic dairy farms, we ran a scenario where feed prices increased 40%, and fuel prices increased by 25% and other farm expenses increased by 4%. In this scenario we also assumed milk production per cow and cow numbers would remain the same. These are conservative estimates of the changes in expenses given the fact that the innovative Vermont dairy farmers would likely figure out some ways to reduce costs.
To achieve a 5% ROE, we estimated that Vermont organic dairy farms would see feed expenses increase by $22,993, fuel expenses by $1,889, and other expenses by $5,218. Net farm earnings would be reduced from $23,200 to a loss of -$6899! For the average Vermont organic dairy farm to achieve a 5% ROE, milk price would have to increase nearly 15% to $32.96 per cwt! Way more than what organic dairy farms are getting for their milk today.
The sensitivity analysis clearly shows that organic milk price must increase if the sector is to remain viable. Since the advent of organic dairy in the 1990’s until 2005, those familiar with the sector cannot remember one farm that has quit organic production and went back to conventional milk production. But in the past 9 months, several organic dairy farms have quit, primarily due to the soaring grain prices. Others are wondering about shifting back to conventional production. What will the future bring? That remains to be seen but it seems necessary that organic milk price must increase or there will be little economic incentive for farms to remain in organic production.
From a social perspective, the organic dairy sector has become a haven for smaller family operated farms that could not or would not continue with the “get bigger or get out” scenario associated with surviving in conventional dairy production. But they have not escaped the situation where rising feed, fuel, and other expenses continue to chip away at their profitability so that they are faced with the same familiar scenario as their conventional neighbors.
The situation is quite simple. If family run organic dairy farms are to survive, they need a higher payment for their milk. Or else, organic dairy farms will not be much different in size from their conventional neighbors. The organic sector has to come to grips with what they are selling to the consumer … organic milk at the lowest possible price or a dairy production system based on family operated farms.
The Numbers for 2006